Petrol and diesel supplier Caltex will temporarily shut its only oil refinery for extended maintenance work to stem losses in the face of slumping demand for fuels due to COVID-19 and as it awaits the next step from its takeover suitor.
The company, which is being examined by Alimentation Couche-Tard for a potential $8.8 billion takeover, also advised it will look at a potential trade sale of a 49 per cent stake in high-value petrol station sites as an alternative to a planned spin-off of that interest into a separate listed company.
However that sale would only proceed if Couche-Tard walks away.
The Canadian convenience retail giant has been examining Caltex’s books since February in what was expected to be an abbreviated due diligence period. But that has been complicated by the crash in markets due to the coronavirus pandemic, which has seen Caltex’s share price fall well below Couche-Tard’s proposed offer price.
Couche-Tard chief executive Brian Hannasch signalled to investors last month that the firm was still interested in Caltex but probably at a price lower than the $35.25 a share proposal. A tentative offer from a rival bidder, UK-based EG Group, was last month deemed too low to warrant granting due diligence.
“Over the coming weeks that due diligence will be brought to a conclusion and we need to work out the way forward from there,” acting chief executive Matthew Halliday told The Australian Financial Review, when asked whether the Caltex board would be open to a lower price from Couche-Tard given the market downturn.
“We still feel very confident that over the long term, those assets set the business up to create a lot of value.”
Shares in Caltex, which also advised it would cut spending this year by at least $50 million, rose 6.6 per cent to $24.51 on Monday.
Under Caltex’s latest plans to adapt to the COVID-19 market shocks, a major maintenance shutdown scheduled for the Lytton refinery in Brisbane in July-August will be brought forward to begin in May. It will be spread over a longer period of time, given the unfavourable market and the fact that the previous 6-8 week schedule is no longer possible under physical distancing rules for the 500 workers involved.
While the work is still due for completion in August, the plant, one of only four refineries remaining in Australia, will be restarted only “when margin conditions have sufficiently recovered”, Caltex said, citing “operating cash flow challenges” at Lytton in the current market.
“What we are trying to do is make sure we do the work at the right time, so when economic conditions, we know, are not conducive to running the refinery,” interim chief operating officer Louise Warner said.
“We believe that demand will restore and the oil markets will restore at some point.”
The price of petrol and diesel for customers won’t be affected, and neither will security of supply, Ms Warner said.
Mr Halliday said the decision would “result in an improved economic outcome and protect cash flows, while demonstrating our ongoing commitment to the Lytton refinery”.
Caltex’s refining margin at Lytton softened to $US4.14 a barrel in February, and Ms Warner noted margins had dropped again in March. Lytton has cash operating costs of $US4-$US5 a barrel.
The rescheduling of the maintenance will also give Caltex more flexibility to supply the range of fuel products that customers want, added Ms Warner. Caltex is seeing an 80-90 per cent drop in jet fuel demand due to flight cutbacks, while retail petrol demand is down 30-50 per cent from last year and diesel demand down 10-30 per cent.
RBC Capital Markets analyst Ben Wilson deemed the “hunkering-down” approach at Lytton as “sensible” given the recent shrinkage in margins.
“We view this as a prudent and pragmatic response to a rapidly evolving COVID-19 situation that is heaping pressure on end-product prices and hence refining margins globally”.
Demand reductions at Caltex’s international operations in New Zealand and the Philippines have been greater due to tougher government restrictions, Caltex noted.
RBC calculated the impact of the refinery shutdown as “minimal” on its underlying earnings forecasts for Caltex as margins remain near EBITDA breakeven levels of about $US5 a barrel. Each month the plant is shut cuts output by about 500 million litres.
On the retail spin-off, Mr Halliday said documentation for an IPO had been completed but that the unsettled market meant the offer was more likely now in the second half than the first. He said Caltex had fielded “a number of approaches” for a potential trade sale of the 49 per cent stake.
“We can see there’s a lot of interest there,” he said, while noting that an IPO had the attraction for Caltex of providing a marker for the value of the property business, of which it would still own 51 per cent and have absolute control of.
Capital spending this year is being cut to below $250 million from a previous estimate of about $300 million to focus only on “critical business items”. A review of fixed costs is also underway to provide extra savings beyond a previously flagged $40 million of cost cuts for 2020.
Caltex also advised it has no debt maturing this year and “significant headroom” to its debt covenants.
Extracted from AFR